World Currency
In the foreign exchange market and financial markets, the term world currency refers to that legal tender which dominates international transactions alongside serving as world primary currency reserve. World currency is also called global currency or supranational currency.
Following economic crisis of 2009, China was the first country to demand that global economy should have a world currency. A UN panel of expert economists proposed changing the existing US dollar-based system by significantly increasing the International Monetary Fund’s special drawing rights.
Depending on numerous properties, currencies can be characterized in many forms. For example, advantages and disadvantages of currencies are dependent on the type of issuer, type of issuance, and type of backing.
A particular relationship of these properties results in different types of currencies.
Recent History
Prior to 1944, United Kingdom’s Pound Sterling used to be world currency.
US Dollar-Following the Bretton Woods Conference in1944, countries around the world started to peg their currencies against the U.S dollar which could be exchanged for a fixed amount of gold. As a result the U.S. dollar became a dominant currency of the world.
After the collapse of the fixed exchange rate regime and the gold standard and the subsequent establishment of floating exchange rates following the Smithsonian Agreement in 1971, nearly every currency around the world was no longer pegged against the United States dollar.
Nevertheless, as the United States continued to remain superpower of the world, dominating in every spheres, almost all international transactions were being conducted with the United States dollar, and since then it has stayed as the de facto world currency. In fact, the dollar has remained as the de facto currency since mid twentieth century.
In the foreign exchange history, the status of the U.S dollar has been seriously challenged only twice even as its dominance has risen over the years. Back in 1980s, the Japanese yen was becoming increasingly used as an international currency however its usage ebbed with the Japanese recession in the 1990s.
More recently the euro (prior to debt crisis of 2008) competed with the United States dollar in the world international finance.
Robert Gilpin, a renowned economist, remarked in his book, “Global Political Economy: Understanding the International Economic Order (2001)”: that in the financial world, about 40 to 60% of the international financial transactions were carried out in U.S. dollars. Besides, for many decades the dollar has also been the world’s primary reserve currency; in 1996, the dollar accounted for about two-thirds of the world’s foreign exchange reserves.
Lots of the world’s currencies are pegged against the U.S. dollar.
Some of the Central American countries, such as Ecuador, El Salvador, and Panama, have gone even further and abolished their own currency in favor of the United States dollar. In the recent past, the U.S. dollar has continued to dominate global currency reserves, with 63.9% kept in dollars, as compared to 26.5% set aside in euros.
A 2011 study on the current dominant reserve currency in central banks showed that dollar might not be the clear dominant currency, because of the major part of Unallocated Reserves reported by central banks.
Euro
Since euro was implemented in 1999, the U.S. dollar’s dominance in the world currency exchange market has fallen down drastically. (By January 1, 2002, physical notes and coins were used all over the twelve euro zone member countries, substituting with local currencies. Later, during next five years, 2 five more EU member states entered the euro zone. )
The euro zone economy became very large as countries such as France, Germany, and Spain entered into single monetary union. As result, financial markets started substituting the U.S dollar with euro as a currency reserve. Furthermore, the euro also inherited the position of a major reserve currency from the German mark (DM), and since then its contribution to official reserves has increased as banks look out to diversify their reserves even as trade in the euro-zone continued to expand.
As with U.S. dollar, some currencies also peg against the euro such as the Bulgarian lev, including some West African currencies like the Cape Verdean escudo and the CFA franc. Besides, there are some non EU countries such as Monaco, Andorra, San Marino and The Vatican City that have adopted the euro as their official currency following an agreement with the EU and ECB
Countries like Montenegro and Kosovo have adopted the euro unilaterally. Nevertheless, any further unilateral adoption of euro both by non-euro EU and non-EU countries is prohibited by the EU and ECB.
By December 2006, the euro surpassed the dollar in the combined value of cash in circulation. In the same period, the value of euro notes in circulation has soared to more than €610 billion, equivalent to US$800 billion.
However, with worsening euro zone debt crisis, which started in 2010, the euro has been under tremendous pressure as investors sought the safety of U.S. dollar.
World Currency History and Current
Spanish dollar in 17th and 18th centuries
During the 17th and 18th century, the circulation of silver Spanish dollars or “pieces of eight” extended from the Spanish territories in the Americas westwards to Asia and eastwards to Europe forming the first ever global currency. Spain’s political supremacy on the global arena, the significance of Spanish commercial routes across the Atlantic and the Pacific, together with coin’s quality and purity of silver helped it become globally accepted for over two centuries.
It was the official currency in Spain’s Pacific territories of the Philippines, Micronesia, Guam and the Caroline Islands and later on in China and other Southeast Asian countries until the mid-19th century. In the Americas it was official currency in all of South and Central American countries, (excluding Brazil) as well as in the US and Canada until the mid-19th century.
In Europe, the territories that accepted the Spanish dollar as a legal tender included: the Iberian Peninsula, in major part of Italy such as Milan, the Kingdom of Naples, Sicily, Sardinia, the Franche-Comté(France), and in the Spanish Netherlands. It was also adopted in several other European states including the Austrian Habsburg territories.
In 1788, when the colony of New South Wales was founded in Australia, it ran into a trouble due to lack of coinage. Consequently, Governor Lachlan Macquarie brought forward the idea of using £10,000 in Spanish dollars sent by the British government to mint suitable coins. The minters simply punched out the centers of the coins. While both the central plug and rims were stamped with a sunburst.
The punched centers were used as the shillings and the outer rims were circulated as five-shilling pieces. The mutilated coins were subsequently no longer acceptable outside of the island, so as an end result, became the legal tender there. These coins to the value of 40,000 Spanish dollars arrived on 26 November 1812 on the merchant ship the Samarang from Madras, through the Honorable East India Company. To stop them from leaving the colony the centers were punched out to make two different issues of coins.
There was a central plug (called as a dump) which was priced at 15 pence and was re-struck with a new blueprint (a crown on the face, the denomination on the back), even as the dollars received an over stamp around the hole (“New South Wales 1813” on the face, “Five Shillings” on the reverse). The holey dollar became the first legal currency produced exclusively for circulation in Australia.
Besides these two currencies, there are other coins/currencies that have been used over the centuries. The Austrian Maria Theresa thaler is accepted still in some back areas of the Middle East and Africa. These coins were first issued in 1741. There was also the Roman Denarius, which remained as world’s dominant currency for hundred years.
Gold Standard (19th – 20th centuries)
Before and in most part of the 19th century, global trade was denominated in terms of currencies that corresponded to weights of gold. Most national currencies at the time were simply the different measures of gold weight. Therefore, some stress that gold was the world’s first international currency. The subsequent collapse of the international gold standard around the time of World War I had considerable repercussion for global trade.
Recently proposed (21st century)
On 16 March 2009, following the April 2009 G20 summit in the Kremlin, the council stressed the need for a global reserve currency – a move aimed at reforming the global financial system. In a document which included proposals for the G20 meeting, it recommended that the International Monetary Fund (IMF) (or an Ad Hoc Working Group of G20) should be asked to carry out specific studies to evaluate the following options:
- “Enlargement (diversification) of the list of currencies kept as reserve ones, based on established measures to encourage the growth of major regional financial centers. In this perspective, G20 should think about possible establishment of certain regional mechanisms which would help in reducing volatility of exchange rates of such reserve currencies.”
- “Introduction of a global currency to be issued by international financial institutions. It seems appropriate to think about the role of IMF in this process and to review the viability of and the need for measures to make certain the recognition of SDRs as a “supra-reserve” currency by the whole world community.”
Subsequently on 24 March 2009, Zhou Xiaochuan, President of the People’s Bank of China, stressed for “innovative reform of the existing international monetary system towards a global reserve currency,” believing it would “considerably decrease the risks of a future crisis and improve the crisis management capability.” Zhou recommended that the IMF’s special drawing rights (a currency basket comprising dollars, euro, yen, and sterling) could serve up as a super-sovereign reserve currency, not easily impacted by the policies of individual countries. However, US President Obama turned down the proposal stating that “the dollar is extraordinarily strong right now”.
Later on July 2009 G8 summit, the Russian president confirmed Russia’s desire for a new supranational reserve currency by screening off a coin minted with the words “unity in diversity”. The coin, an example of a future world currency, highlighted his call for using a mix of regional currencies as a way to tackle the global financial crisis.
On 30 March 2009, at the Second South America-Arab League Summit in Qatar, Venezuelan President Hugo Chavez suggested the creation of a petro-currency. According to Chavez, this legal tender would be supported by the huge oil reserves of the oil producing countries.
Views in support of a supranational legal tender
Advocates, (particularly Keynes), of a global currency often arguethat such a currency would not suffer from inflation, which, in extreme cases, has had devastating effects for economies. In addition, many believe that a global currency would make carrying out international business more efficient and would promote foreign direct investment (FDI).
A frequently over-looked option to an establishment-created global reserve currency is for anyone to implement already existing mechanisms that traditionally have worked very well in carrying out international business. There are, for instance, no impediments for legal or physical persons to start drawing contracts and invoicing in XAU – Gold – as opposed to the USD, EUR or JPY (Japanese Yen).
Single Global Currency
Another definition of a world or global currency refers to a theoretical single global currency or super currency, as the proposed terra or the DEY (an acronym for Dollar Euro Yen),created and carried by a central bank which is used for all transactions around the world, and having nothing to do with the nationality of the entities (individuals, corporations, governments, or other organizations) drawn in the transaction. No such official currency at present exists.
There are many different variants of the idea, together with a possibility that it would be managed by a universal central bank or that it would be on the gold standard. Supporters often argue that the euro as an example of a supranational currency effectively implemented by a union of nations with different languages, cultures, and economies. Alternatively, digital gold currency can be seen as an example of how global currency can be adopted without realizing national government consensus.
A limited substitute would be a world reserve currency issued by the International Monetary Fund, as a progression of the existing special drawing rights and used as reserve assets by all national and regional central banks. On 26 March 2009, UN panel of expert economists called for a new global currency reserve scheme to replace the current US dollar-based system. The panel’s report observed that the highly expanded SDR (special drawing rights), with normal or cyclically adjusted emissions regulated to the size of reserve accumulations, could add to global stability, financial strength and global equity.
Also, some evidence suggests the world may develop multiple global currencies that exchange on a singular market system. The growth of digital global currencies owned by privately held companies or groups such as Vent advocate that multiple global currencies might present wider formats for trade as they gain strength and gain more acceptances.
Complexities
Limited extra benefit with additional cost
Some economists argue that a single world currency is needless, because the U.S. dollar is giving that many of the benefits of a world currency while staying away from some of the costs. If the world does not form a most favorable currency area, then it would be reasonably inefficient for the world to share one currency.
Economically mismatched nations
In the present economic scenario, nations are not able to work mutually. In other words, nations are not close enough to be able to create and maintain a common currency. There has to be a high level of faith between different countries before a proper global currency could be adopted. A world currency might even destabilize national sovereignty of smaller countries.
Wealth redistribution
The interest rates set by the central bank ultimately determine the interest rate customers must pay on their bank loans. This interest rate has an effect on the rate of interest among individuals, investments, and countries. Letting somebody borrow, (mainly poor) involves more risk than lending to the rich. As a consequence of the larger differences in wealth in different areas of the world, a central bank’s ability to set interest rate to make the area grow economically will be compromised to large extent, since it places wealthiest regions in conflict with the poorest regions in debt.
Usury
Usury – an accrual of interest on loan principal – is forbidden by most religions.
Believers in Christianity and Judaism are forbidden to charge interest to other adherents or to the poor. A great deal consciousness of this prohibited act has vanished. Islam also forbids usury, called as riba.
A large number of religious adherents who are against the paying of interest are at present able to use banking facilities in their countries which are to regulate interest. An example of this is the Islamic banking system, which is characterized by a nation’s central bank setting interest rates for nearly all other transactions.